Credit ratings – what does your business look like?

Credit ratings seem to be becoming more and more relevant nowadays in the world of business.  From experience, there are matters that business leaders should be aware of in terms of the way that credit scores are calculated and how this can impact the business.

Good business practice has certainly been to monitor your customers and clients’ credit-worthiness by subscribing to a reputable credit rating agency. You are notified of any changes to a customer’s credit score, up or down and are advised of a recommended credit limit for those customers.

The credit rating agencies use sophisticated statistical algorithms to calculate credit scores and are generally based upon economic and industry factors, as well as referring to the documentation that has been filed at Companies House. Scores range from 1 to 100, from what is deemed to be very high risk to very low risk.

So the question is…what does your business look like in terms of a credit score and rating?

Customer credit reviews clearly should be continued; however, I would recommend that companies also review their own credit score on a regular basis too. I have seen on at least two occasions where businesses had not realised that their credit score had actually dropped and were totally unaware of this!

Not many people will be aware that one of the major credit rating agencies changed their scoring algorithm back in December 2019 (yes, that seems a lifetime ago!) and this affected all companies scoring on their platform. The two occasions I refer to, both scores went down and one in particular went from a score of 81 very low risk, to a score of 45 moderate risk! The company only found out when a new supplier refused to give them credit due to their credit score.

So what happened? Following a conversation with credit rating agency concerned, it primarily was the change of basis used on their system that caused the drop. The business affected was tendering for various contracts at the time, so with a drop in credit rating there was a real risk that they wouldn’t get past the first round of the tendering process.

We eventually overcame this hurdle through a number of relatively simple measures and we managed to get the company’s score back up to 53 low risk, by talking to the credit rating agency concerned and providing additional information, as well as updating certain information on Companies House. It was a team effort, but we got there.

Top tips when looking at your own company credit score:

  • Check your score – did it move back in December 2019?
  • Check that the company has the correct SIC (Standard Industrial Classification of economic activities) code as recorded at Companies House. You can have more than one if you have more than one activity.
  • What did your last set of company accounts filed at Companies House say about your business? How strong was your balance sheet in comparison to the previous year?
  • Is all of the information recorded at Companies House up-to-date? File the relevant changes if not.
  • What do your suppliers say about you? Look at the Trade Payment Information noted on the company record. Look at ways to enhance this where possible.
  • If needs be, talk to the credit rating agency. Understand their scoring system. Do they need any more information that could benefit your score?

It just leaves me to say, we’re here to help. Our clients are owner-managed, entrepreneurial businesses whom we have strong relationships with that allows us to understand what drives them and what their business journey looks like. Through this approach, we have successfully helped a number of businesses review their credit scores and made changes that have helped their scores.

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